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Amazon vs. Wal-Mart - My Annual Comparison

Here is a high-level comparison of Amazon to Wal-Mart. Note
that Amazon uses a calendar year, while Wal-Mart uses a traditional retail
fiscal calendar ending January 31st. I’ve compiled some numbers and
ratios from each company for their respective fiscal year periods that include
most or all of 2014. Therefore this comparison is slightly off. However, the
comparison does include the traditional peak seasons of back-to-school and
Christmas in both.

To make my job easier, I’m listing Wal-Mart first each time
in the following comparisons.

Revenue: (in
billions)

Absolute: $485.6 vs.
$89.0

Revenue Growth $: $9.4 vs. $14.5

Revenue Growth %:
2.0% vs. 19.5%

There is no question that the clear growth winner is
Amazon – adding $5.1 bil more in revenue in the last twelve months despite
Wal-Mart’s base size advantage. And the
rate of growth is indeed impressive at almost 10X Wal-Mart’s.

Operating income: (in
billions)

Absolute: $27.1 vs. $0.2

Operating income growth $: 0.3 vs. $(0.5)

Operating income growth %: 1.0% vs. negative

Operating income as a percentage of total revenue: 5.6% vs. 0.2%

While Amazon exceeded Wal-Mart’s revenue growth, Amazon
managed to add $14.5 billion in revenue and not have any of that flow to
operating income.

Net income: (in
billions)

Absolute: $16.4 vs. $(0.2)

Net income growth $: $0.3 vs. $(0.5)

Net income growth %: 2.1% vs. negative

Net income as a percentage of sales: 3.4% vs. (0.3)%

Amazon has no income.

Cash Flow: (in
billions)

Note: cash flow as presented here is: cash flow provided
by (used in) operating activities. That is, net income plus depreciation, amortization
and stock comp plus changes in working capital. These are taken directly from
the financial statements filed with the SEC for Amazon and the earnings release
for Wal-Mart.

Absolute: WMT $24.4 vs.
AMZN$ 6.8

Cash flow as a percentage of revenue: WMT 5.2% vs. AMZN
7.7%

I’ll admit that I found this percentage was particularly
surprising. Given that Wal-Mart starts with a 3.7 percentage point advantage
from net income, how does Amazon end up with a higher percentage? The details point to two factors:
depreciation and amortization (non-cash) account for a far larger share of
revenue for Amazon [5.33% than for
Wal-Mart [1.88%] and stock compensation (again non-cash) is a much larger
percentage of revenue for AMZN than WMT. (Note that Wal-Mart did not show stock
comp as a separate component in its earnings release. Therefore I’m concluding
that it is less material. WMT certainly has stock comp expense. I may find time
to update this when it files its 10K). Given the physical store presence of
WMT, AMZN’s higher depreciation and amortization is also somewhat surprising.
Does AMZN have a more conservative depreciation policy?

Returns

ROIC: WMT 13.3% vs. AMZN (0.7)%

ROE: WMT 19.6% vs. AMZN (2.4)%

ROIC defined as net income plus tax-affected interest
expense divided by equity capital plus interest bearing debt. Equity plus
interest bearing debt is calculated with a two point average of beginning and
ending balances.

ROE is a simple net income divided by a two point average
of beginning and ending equity.

Valuation

Price to sales: WMT 54.9%; AMZN 200%

Price to book: WMT 3.1X; AMZN 16.6X

Enterprise value to EBITDA: WMT: 8.7; AMZN: 38.

Disclosures

I own $WMT. I’ve
owned it for a very long time. I don’t own AMZN.

I shop both regularly, particularly the Sam’s Club division
of WMT for numerous products, and principally books and music from AMZN. I’m a loyal customer of each. I’m also a
published author on Amazon Kindle. Two titles: Jobs Over Fifty: The Guide to Finding New Employment for The
Experienced Worker and Survive And
Prosper Fifty Steps to Job And Career Security.

Observations

Clearly holders of Amazon are being rewarded for stellar
revenue growth and industry disruption.
And one could argue that those factors require some non-traditional
valuation techniques. I would argue to
the counter: Amazon is no longer a new business; it has been around now for a
generation. I assume that there is
little further efficiency gain for Amazon–i t operates highly efficiently
today–or that any productivity gains it achieves are likely to be matched by
similar gains by Wal-Mart. Therefore, it is difficult to see how Amazon
produces an attractive return on capital without price increases-which would,
in turn, reduce its advantage.

There are claims that Amazon’s real value lies in its
cash flow. And clearly it is higher as a percentage of revenue. But WMT’s absolute cash flow dwarfs AMZN,
albeit that much of that is consumed by dividends which AMZN doesn’t pay.

WMT’s ROE benefits nicely from years of stock buybacks
thinning the equity as well as a decent level of leverage. The resultant ROE (using an average of
beginning and ending equity) is a very respectable 19.6% and ROIC, helped by very low interest
rates, is a little better than average at 13.3%. Conversely, I would argue that, while
Wal-Mart can clearly handle its debt load, the amount of leverage may be
hurting the share price some.

Finally, the returns on capital speak for themselves. If
you have essentially no income, you have no return to capital. If shareholders never demand a return of
their capital, then I suppose there is no reason to provide a return. A unique business model indeed.

My Position

I’ll continue to hold Wal-Mart, collect my increasingly
rich dividend, and shop at both. I
predict that Amazon’s share price will come to earth at some point, but I don’t
have a sufficient conviction to short it – and shorting against a billionaire
CEO is too risky a strategy for me.

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About Me

Grew up in Memphis, worked my way through the local university, married my high school sweetheart - still married 42 years later. Played in a rock band, couldn't make a living, became a CPA. Raised two great sons. Moved all over the U.S. with different finance and management jobs. Now working with multiple start-ups as an investor and advisor.